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Risk Management:Different types of risk corporations must identify and account for
Corporations face many different risks when conducting business. The businesses that manage risk efficiently create a competitive advantage over others. The main aspect of risk management is to control the losses the company receives because of risk. Risk is the uncertainty and unknowns of business transactions and operations. Risk is a part of business and companies will need to take risk in many aspects of their decisions. The different risks that will be mentioned;
- organizational risks
- business risks
- price risks
- credit risks
- pure risk
Organizational risk is a part of the company’s infrastructure. The companies that spend on office automation, new technologies, more efficient systems, and better communication are taking organizational risks. These items will add cost to the business but the uncertainty is the amount of efficiency they will add to the organization. Companies that choose not to add these items to their business are taking the risk of losing a competitive advantage and operating less efficiently than their competition. The key to staying on top of a competitive industry is to become as efficient as possible. The decision that the risk management team must make about organizational risks is the cost-benefit analysis. If the updated equipment will have more benefits than the cost, then the company should implement it.
Business risk involves the possible reductions in business value from any source. This risk can be managed by strategic planning, hedging, alternative solutions available, and staying prepared. The company can have plans in place to react quickly to different scenarios. This will save the company time and money by limiting downtime and disrupted operations. If a company must wait until they can solve a problem, then they will disrupt operations and decrease productivity until the solution is found. The company risks the chance they will not be able to provide the products or services they are supposed to and can cause customers to use their competitors products or services. Companies want to retain loyal customers because it is cheaper than finding new customers. Planning for problems and different scenarios will help the company retain customers and ensure their products or services are available.
Price risk involves the uncertainty of the cash flows because of possible changes in input and output prices. Changes in the price of raw materials, labor, or any other variable cost will affect the cash flows received by the company and should be considered when choosing a price for a product or service. Output prices like transportation, marketing, promotions, and creating awareness of a product or service will also affect the cash flows received for the products or services. Companies must take many factors into their decisions when they are pricing products or services to ensure their cash flows are not affected too much in which the product or service becomes not profitable.
Credit risk is considered to be the money the company lent out to customers and other parties will be paid back late or not at all. This is the accounts receivable section for the company. The company sells on credit to help increase revenues and there is a risk the money will not be paid on time or at all.
Pure risk is the reduction in value of assets because of damage, or theft, legal liabilities, workman’s compensation, death, or other illnesses. Companies that loss assets because of damage and theft will lose the revenue of those assets and will have to count them as a loss. Legal actions can cost companies money and cause a bad reputation that will cost more money to repair. Workman’s compensation forces a company to continue paying employees who can no longer be productive for the organization. Death or serious illness caused by company negligence will cost the company money by fines or lawsuits.
Corporate risk is relevant in every industry. Many factors influence decision making and the management of risk. Risk is a part of every aspect of business. Organizational risk deals with the infrastructure of business, business risk involves the reduction of business value, price risk involves the input and output prices, credit risk refers to accounts receivable, and pure risk involves everything from legal liabilities to death. Companies must be aware of all forms of risk and manage it efficiently. The company should have insurances to cover loss, strategic plans to control losses, and make decisions based on outcomes influenced by risk. The companies that manage risk efficiently will be the companies that have longevity.